Gold Demand: Heating Up in the Middle East

Everyone expected last year to be the year that Middle Eastern gold demand came alive. Recent interpretations of Sharia law indicated that it would be OK for Muslims to own paper gold, such as ETFs, rather than just physical gold held as a wealth asset.

Because of the increasing demand, most market watchers called the changes positive and were looking for more.

It looks like the next round has arrived. Dubai announced they are launching a spot gold contract late this March. While traditional Islamic investors may continue their caution, watching both adoption of this new trading vehicle and acceptance by Sharia courts, it is expected that the new contracts will attract increasing amounts of interest over the next year. At that point, with any initial issues discussed and ironed out, we expect to see more Islamic funding involved in gold trading.

What would this do to the gold market?  Nothing more, and nothing less, than you’d expect from more demand.  In Econ 101 you were taught that more demand drove up prices.  That is true in general, but markets also have a negotiation phase where the sellers and buyers negotiate over price.  One of the tenets of Shariah investing law prohibits making a profit from trading gold, among other things, at another’s expense. This is commonly understood as a restriction on speculation, but holding gold as a long-term wealth asset is not prohibited.

So this Gold Enthusiast expects increased gold demand from Islamic sources over time. There will probably be more Sharia-acceptable trading vehicles developed as we go along.  The character of this involvement indicates it will drive a floor under gold prices, rather than quickly ramping them up. And of course, price floors are called support – which is what higher prices are built on.  At first we’re looking for more stability underneath, which means more looking up for the future. Maybe not a big quick increase from this one demand, but a welcome addition.

Signed, The Gold Enthusiast

DISCLAIMER:  The author has no positions in any mentioned security.  The author is long NUGT and JNUG, and may add to or sell these positions in the next 48 hours.

Related: Gold Sales Are Down – Except in These 2 Countries 

About the author

Mike Hammer

Mike Hammer has had a wide-ranging career, with trading and investing as a continuing theme. Mike graduated from UC Berkeley with a business degree, then worked with Macy's in their operations arm. He left Macy's and spent a summer trading his own account, which taught him a lot about trading in general and markets in particular. Trading through the Black Monday and the Crash of 1987 showed him how most people are unprepared for upheavals in their trading. He then joined Waddell & Reed as a financial advisor, helping regular people understand their finances and meet their life goals.

Then came the usual story - Mike met and married the lady of his dreams. They moved to upstate New York, where Mike worked first for a small manufacturing consulting company, then Cornell University. While loving the work and the higher-education atmosphere, Mike missed the world of finance. Eventually, he signed up for stock trading coaching with the Adam Mesh Trading Group, to learn from people who understood modern markets. Within a year, Adam asked Mike to become a stock trading coach.

Since then, Mike has trained over 200 individuals, spoke at several national conventions, and is a frequent contributor to conference calls across the Adam Mesh community. Mike writes The Gold Enthusiast daily newsletter, runs the Golden Hammer trading service, and participates in the Mesh Private Portfolio. He also keeps a position in international education which keep him in touch with "the student mindset". Mike closely follows the gold, energy, and financial sectors. His motto is "Plan your trade, then trade your plan!"

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